Common Ground
in Your Portfolio

Part II
by Gregory C. Cohen

   In the early days of bankcard, pricing was fairly basic´┐Żmerchants paid a discount rate and small transaction fee or a bundled rate (discount only) and a few minor ancillary fees to cover chargebacks, retrievals, ACH returns and a potential statement fee. With competition at all time highs, significant price compression and the Acquirer's need to maintain high levels of profit, many new pricing methodologies have been introduced. When I use the term pricing policies, I am referring to the actual pricing elements that are charged to merchants to increase/maintain satisfactory profit levels. I have not listed every pricing element a merchant may be charged, but some of the newer pricing policies Acquirers use to increase profitability and manage their portfolios. Additionally, I do not condone the use of any specific policy, but only wish to reveal some of the newer, more creative pricing elements.

Authorization & Transaction Fee

   In the beginning, Acquirers charged merchants a straight transaction fee in addition to the discount rate. Today, many small Acquirers have used the per-item element of the interchange categories to market lower transaction fees by separating the per-item interchange cost of $0.10 and the "Acquirer imposed" transaction fee. ISOs can then say they have a $0.20 transaction fee when in reality, the merchant will be charged $0.30 per transaction. Often the $0.10 per item fee is called an authorization fee on the merchant statement and the $0.20 (more or less) is named the transaction fee. This technique allows Acquirers to market much lower transaction costs.

Annual (Semi-Annual) Fee

   Call it the Acquirer's holiday bonus, but today smaller merchant Acquirers impose an annual or semi-annual fee on their merchants. This fee, ranging from $49 - $149, helps boost profits to the ISO and often can be quite substantial. A modest 10,000 merchant portfolio with an annual fee of $100 can bring the Acquirer an additional $1,000,000 with no cost elements attached. Not a bad Christmas present.

Warranty/Replacement Fees/Clubs

   Many Acquirers have instituted merchant clubs, warranty programs and other such value-added services for their merchants. There is value in these services but the mark-ups are tremendous. Not to mention, how often do these terminals really break? About once every 3 years. And how many merchants on a club program actually call for their supplies? Very few. These "value-added" services have become a very large profit center and revenue source for many Acquirers.

Monthly Minimums

   The monthly minimum is a fee imposed by Acquirers on merchants so they can be assured a minimum level of revenue from a merchant. Over the past few years, Acquirers have become more creative in the ways in which this fee is computed. This fee can be computed off (among others) all fees billed to a merchant, all transaction related fees (discount and per item) and only discount fees. The way in which this fee is computed can create greater or less profit for an Acquirer. The majority of Acquirers today only compute the discount fees as components of the monthly minimum, thus creating the greatest profit from this line item.

Batch Header Fees

   Every time a merchant batches out and settles there is a cost for the communication of the transaction to the processor, preparation of the settlement file and the origination of the Acquirer's ACH to pay the merchant. These days, many Acquirers have taken the position of charging increasingly larger fees for this particular transaction. I have seen batch fees as high as $0.50. Other Acquirers just bill the batch fee as another "transaction," charging the merchant the same $0.20 or $0.25 as the per item fee. This lucrative pricing element has become standard billing for most Acquirers and can help drive additional profits into the portfolio. A merchant who settles once a day (25 days/mo) and is charged $0.25 will be billed $6.25 from their Acquirer.

Help Desk Fees

   Certain Acquirers have started charging their merchants for help desk calls. If an Acquirer can pass on the costs of the help desk to the merchant, they can charge a lesser fee for processing. Fees can range from $2 to $5 per call. The passing of these fees along to the merchant can help drive additional profitability at the merchant level. However, merchants who pay excessive fees will be prone to convert to Acquirers who do not charge additionally for this service.

   In the hyper-competitive world of the payment business, Acquirers are forced to find ways to squeak-out additional revenues from merchants. The pricing policies discussed above are just a few of the newer billing elements and methodologies that Acquirers have imposed on merchants. Acquirers must continually battle between the increasing of fees and the churn that will come from the excessive "fee-ing" of merchants. As processing becomes more commoditized and Acquirers become more creative, we will see more and more ways of driving profits into these portfolios. I caution Acquirers to not be too creative, as this can sometimes waver on the side of grey, and in the Acquiring world, grey can put the Acquirer in great jeopardy.